Monday, November 1, 2010

Fragment of an Argument

David Colender, in Beyond Microfoundations: Post Walrasian Macroeconomics, explains that Post Walrasian macro is based on the idea that complexity of macro economy and limits to individual rationality mean that there will not be a unique equilibrium. Institutions and non-price coordinating mechanisms are needed to constrain the available degrees of freedom, to produce stability. But "while many past critics of Walrasian economics have based their criticism on the excessive mathematical nature of Walrasian models, I want to be clear that this is not the Post Walrasian criticism; if anything, the post Walrasian criticism is that the mathematics used in Walrasian models is too simple. ... The reason Marshall stuck with partial equilibrium was not that he did not understand the interrelationships among markets.... Instead Marshall felt that general equilibrium issues should be dealt with informally until the math appropriate for them was developed. That has only recently happened."

I heard something very similar from Duncan Foley last week: Heterodox macro needs to be more mathematically sophisticated than the mainstream, with nonlinear regressions and models using statistical mechanics drawn from physics.

Sorry, I'm not buying it. Colender and Foley are right that it's not possible to construct a consistent, tractable, intuitive model of the economy using linear equations. But the solution is not to construct intractable, non-intuitive models using more complex math. It's to abandon the search for a general model and focus instead on locally stable aggregate relationships that allow us to tell causally meaningful stories about particular developments. We don't need a theory of institutions in the abstract, but historically grounded accounts of specific institutions.

^chris' link: "Economists’ neglect of this theory is especially unfortunate, since it could be of great help in resolving macroeconomic disputes..."

I didn't bother reading the end of that sentence. I'm pretty sure that the failure to recognize and incorporate macroeconomic disputes is at least partly why we got into this mess in the first place.

And I might be wrong, but it sounds like Foley would agree with these CMU prof's -- namely that formal methods applied to economy can lead us to the holy grail, the DGP.

In the end, I half-agree with Josh -- we definitely need a closer examination of particular events and institutions but I do think we need theories as well, just not exclusively the formalistic type and also to recognize that new fancy mathemtics does not equal TRUTH.

I like INET and Cosma Shalizi is a statistics god, as far as I am concerned. but I'm not convinced that the CMU project will accomplish anything, basically for the reason Dan alludes to. The assumption is that there is a discrete data-generating process underlying economic dynamics with stable statistical properties, albeit a more complex one than can be captured in linear models. It's not clear to me why we should believe that.